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Archive for the ‘Glass-Steagall’ Category

Representative John Campbell (R-CA), Chairman of Financial Services Subcommittee on Monetary Policy and Trade, discusses new legislation to eliminate “Too Big to Fail” with Peter Cook on Bloomberg Television’s “In the Loop with Betty Liu”. Campbell’s legislation, the Systemic Risk Mitigation Act, would prevent future taxpayer-funded bailouts of large financial institutions that currently pose a systemic risk.

Federal Reserve Governor Daniel Tarullo, Dallas Fed President Richard Fisher and Senator Sherrod Brown (D-OH ) have all said recently that the 2010 financial reform legislation better known as Dodd-Frank has failed to reduce the size of the big banks even though its law promised to do just that. Now Republican Congressman John Campbell of California has introduced his own bill to deal with too big to fail institutions.

Its purpose: to protect the banking system while eliminating the implicit guarantee of a government bailout paid for by taxpayers.

Campbell told Yahoo’s Lauren Lyster:

Campbell’s Systemic Risk Mitigation Act would require banks with at least $50 billion in assets to hold additional capital, including at least 15% of their assets in long-term bonds. If a bank were to fail, those bondholders would have to take of loss of at least 20% on their investment, which could pressure banks to reduce their debt and protect taxpayers from a government bank bailout.

“Having investors with a lot of skin in the game is a better regulator than having a government regulating watchdog,” says Campbell.

His bill would also repeal the Volcker Rule which is included in Dodd-Frank and bans proprietary trading. Campbell says the Volcker rule wouldn’t be necessary with the additional capital banks would be required to hold but it “wouldn’t hurt things if you left it in.”

While this is a good start, it doesn’t go far enough.  15% capital isn’t sufficient, not for the kind of leverage we know that the TBTF banks have been using.  It is imperative that everyone understand that the banks have ZERO capital requirements, which lack of requirements were implemented courtesy of Henry Paulson and with the passage of EESA and TARP.  At minimum, what is needed is the restoration of Glass-Steagall, which would ensure that banks could not co-mingle commercial banking and investment banking or preferably implementation of Karl Denninger’s One-Dollar-Of-Capital.  To do anything less, is nothing but an exercise in futility.

Karl Denninger discusses Glass-Steagall and One Dollar of Capital.

Glass-Steagall Debate Part 1

Glass-Steagall Debate Part 2

This morning Jim Cramer, along with the rest of the CNBS crew, actually “endorsed” a return to Glass-Steagall in the wake of the JPM disaster.

When asked “but won’t that make American banks less competitive?” he answered with a bluster that was basically this: “What, like BNP Parabas?”

Yep.

Glass-Steagall is a good idea but it doesn’t go far enough.  The correct solution, as I have repeatedly pointed out, is One Dollar of Capital.

This is the only solution to both preventing banking panics and long-term economic stability.

One Dollar of Capital:

• Stops counterfeiting of the currency.  Without the ability to create unbridled credit money the commercial banks and Fed can no longer create pretend GDP, which instantly reflects into asset prices in a bubble, foisting the costs off on those who cannot take advantage of those asset price increases.  This is how your wealth and future have been systematically and intentionally looted over the last 30 years, and it’s one of the oldest games out there when it comes to banking.  President Jackson knew it, as did others before him; this scam job literally goes back to Hammurabi!  This old con must go away.
• Ends — without question — systemic risk.  Since there is no longer unbacked emission into the economy there is no longer any possibility of systemic risk.  A bank that wishes to loan more than the immediate liquidation value of an asset must attract actual capital from stockholders or bondholders to lend; it cannot create credit money unless it can show a perfected security interest against an asset that is worth more than the credit money created.
• Returns credit to its legitimate function in the economy — self-liquidating lubrication for trade.  A self-liquidating loan is not inflationary and has no longer-term impact on the economy.  It permits the use of credit for legitimate lubrication of commerce; trans-national trade, for example, relies on letters of credit to guarantee payment for goods in transit; the goods are the asset securing the paper.  Likewise, a loan for 80% of a house’s market value is secured by the house, and if marked to the market on a reasonable basis (e.g. every three months or so) it is safe as additional capital calls will certainly occur before the value goes negative.

One Dollar of Capital simply says that you cannot issue unbacked loans.  Period.  You can lend against an asset, but only to it’s immediate liquidation value in the marketplace.  That’s it.

Our current paradigm requires a roughly 6% excess asset valuation in banks.  We retain this standard.  Banks are then free to choose how close to that line they wish to dance; invasion of that 6% safety threshold results in immediate liquidation of the firm.  If they wish to lend at 94% of a house’s value they can, but any movement against them results in the position going underwater.  Most will choose to build in some sort of reasonable cushion — like 20% down — to prevent this.

All derivative positions must be individually reserved; nobody may depend on someone else’s promise to cover a transaction as a promise is not capital.  If I wish to be short a derivative that requires me to deliver a given instrument then at the instant that position goes into the money against me I must be able to clear the underlying trade and must possess the actual capital to do so.  If I can’t clear the trade at any instant in time then my firm is liquidated — period.

It’s not that difficult to understand folks.  Oh sure, the mavens of Wall Street have screamed bloody murder about any such proposal, claiming that this would “damage American competitiveness in financial services.”

My retort in 2008 was “If you wish to juggle jars of nitroglycerin I hope you don’t mind if I ask that you do it in your country rather than in ours.”

Now, four years on, we’re finally hearing similar sounds in the mainstream media.

The effect of this regulatory change would be to end derivative trading by any actual bank.  “Investment banks”, which take no deposits and are funded entirely by investor capital with no ability to write credit money into existence, can trade all they want.  Margin supervision is perfectly adequate here, as the risk lies entirely within that firm.  That’s fine.

As I wrote in Leverage (click on the book cover to the right to buy):

But One Dollar of Capital as presented above both goes further and shuts down all the schemes and risk-hiding that banks can engage in, making a bank an effective public utility, while retaining private ownership of the financial system. Whether a bank takes deposits under this standard becomes immaterial as deposit-based lending cannot happen on an unsecured basis.  Banks that wish to loan against a known asset value can do so but to lend unsecured they must acquire lent capital from the market via the sale of stock or bonds, and cannot use depositor funds for this purpose.

We must end the unbacked emission of credit money into the system.  That is where all of these problems come from — fake GDP, destruction of purchasing power, buying of votes and systemic instability.

It all begins and ends there and any Presidential, House or Senate officeholder or candidate who does not understand this is unfit to hold the office.

Those who do understand this and yet refuse to act are aiding and abetting economic terrorism and must be held to account.

From Janet [Tavakoli] this morning (my editorializing is below)

JT Note:

If you wanted to kill the only remaining viable bill for the return of Glass-Steagal, then quashing Congresswoman Marcy Kaptur’s (D. Ohio) chances would be one way to do it.  Congresswoman Kaptur has the principal bill in the House—the only remaining bill in Congress—and has slowly and steadily gained support for it with the Democratic Caucus.  She’s also the only Member that has asked insightful questions at the MF Global hearings—a hot button issue, because Jon Corzine was huge fundraiser/allocator and is well protected in Congress.

You may be aware that Congresswoman Kaptur is up for reelection in a newly redistricted Ohio.  The redistricting was so odd that she had to run—and won—in the primary against former Congressman Dennis Kucinich (he’s also made a try for the party’s nomination for president in past primaries and failed).  After his loss, Kucinich has not (yet?) endorsed her.  I don’t know the reasons (my guess is pettiness), but it’s all the more odd, since the Democrats just lost a representative (him) and Congresswoman Kaptur must run in a substantially changed district representing to a great degree a new-to-her constituency.  As a practical matter, raising funds to run as a Representative is difficult, so one would have thought he’d lend support, particularly since…

Congresswoman Kaptur’s opponent is Samuel Wurzelbacher, aka “Joe the Plumber,” who won the Republican primary.  Herman Cain has already come out in support of Wurzelbacher.

Best,

Janet

P.S. Disclosure: I don’t consider myself a member of either political party.  I vote as an Independent. In the last presidential election I contributed ($1,000 each) to both then Senator Obama’s (D. Il.) campaign and John McCain’s (R. Arizona) campaign and in the end voted for John McCain.

P.P.S.  You may also find this of interest: Congresswoman Marcy Kaptur Confronts MF Global and Wall Street

Huffington Post – December 26, 2011

Folks, if you want to vote “left-right” in this election in a race like this you’re free to do so, but you’re a fool.

There is no issue more important in the present time than putting the banks back in the box they were in during the time of Glass-Steagall.

If we do not both do that and stop the deficit spending this nation is finished.  It is mathematically impossible to sustain the deficit spending trends we have today and if we allow the financial institutions to continue to gamble with customer funds and counterfeit the currency when, not if, the corner is found on the deficit the entire financial system will implode at the same time we have a government funding crisis.

Down this road we can lose our nation.  For real.

Wake up America.

Senator Tom Harkin (IA)

Senator Harkin is making an excellent point: Prior to the CFMA of 2000 customer funds could not be invested in other than municipal or US Government debt fully guaranteed by the US Government.

And the Republicans want less regulation, not more, and they are not calling for people to go to prison and every dime missing taken back from the executives who ran the company so the customers are made whole.

Yep.

As it stands right now any account you hold at any brokerage can be effectively stolen through being lost via the same mechanism.  Got that?  Good.  Your 401k, IRA, anything — all at risk.

Now here’s the disingenuous part of this: It wasn’t the “investment” that led to the problem.  It was off-balance-sheet games that led to the exposure and leverage being hidden from regulators, customers and investors.  Yet nobody is calling for an immediate end right now to those games.

Senator Harkin, incidentally, voted against repealing Glass-Steagall.

When you’re right, you’re right – and Senator Harkin is right.

He just doesn’t go far enough.